Is Spectra Energy Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Spectra Energy (NYSE: SE) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for The graphs you're about to see tell Spectra's story, and we'll be grading the quality of that story in several ways:

Growth: are profits, margins, and free cash flow all increasing?

Valuation: is share price growing in line with earnings per share?

Opportunities: is return on equity increasing while debt to equity declines?

Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you Now, let's take a look at Spectra's key statistics:

How we got here and where we're going Things don't look good for Spectra today. The natural gas specialist earned only one out of nine possible passing grades. One major source of that weakness is Spectra's falling free cash flow, which may not be able to support its current dividend distribution if the decline continues. Anemic growth everywhere else also underscores the difficulty of succeeding when nat-gas prices remain low. Will Spectra Energy be able to move past this weakness around and rebound, or is the utility services provider going to be tarnished for some time to come? Let's dig a little deeper.

Natural gas companies have been recovering slowly from tough times, the result of weak natural gas prices resulting from persistent oversupply. Global natural gas consumption is expected to increase by a rather low 0.6% annually through 2040, which might not be so bad if the U.S. nat-gas infrastructure could be tuned to meet international demand, thus opening Spectra and other players to higher prices elsewhere in the world.

Spectra is also nearing the end of its spin-off of its U.S. transmission, storage, and liquid assets to Spectra Energy Partners (NYSE: SEP) which is scheduled to be completed by 2014. This handoff will enable Spectra to focus on fewer lines of business, and it might also result in higher dividends for Spectra's shareholders, as the company will own around 82% limited partnership shares in SEP once the transaction is complete. Spectraand its MLP subsidiary SEP have both expanded the scale and length of their contracts, from 119,000 barrels per day (mbpd) to 225 mpbd and from 1.5 years to 11 years, respectively, on their Express-Platte pipeline. Spectra also recently entered into a partnership with NextEra (NYSE: NEE) subsidiary Florida Power & Light to construct a $3 billion natural-gas pipeline, which will stretch from Alabama through Georgia to Florida. This infrastructure project is expected to begin in 2016 and will take at least a year to complete.

Spectra could also boost its revenue growth on the back of new capacity-adding projects. Fool analyst Taylor Muckerman notes that Spectra has set up a joint venture with DCP Midstream and Phillips 66 (NYSE: PSX) to lay down two pipelines, adding an additional nat-gas capacity of about 1 billion cubic feet per day. This will link lucrative fields in both the Eagle Ford and Permian basins to existing infrastructure in the Mont Belvieu area in eastern Texas. In addition, Chesepeake Energy (NYSE: CHK) is contracting with Spectra on a $500 million, 73-mile pipeline, which will connect Marcellus Shale reserves with the Gulf Coast. These deals, combined with its spinoff, could help Spectra overcome a period of fundamental weakness and provide returns backed with growth on its top and bottom lines.

Putting the pieces together Today, Spectra Energy has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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